How to switch factoring companies: A step-by-step guide

Are you trying to switch your factoring company but don’t know where to start? It is pretty common to feel stuck while navigating through factoring contracts, as finding a factoring company that fits your needs can be a complicated process. Keep reading to learn the steps you’ll need to take to switch your factoring company, plus our top tips on what to look out for in a new company.

Step 1: Review your existing contract

When you consider switching factoring companies, the first thing you’ll want to do is look at your current contract with your existing company. Specifically, look for any clauses that might indicate how long you’re obligated to remain under the contract. You may want to create a timeline and plan for switching factoring companies based on the time remaining on your contract.

If you want to cancel your agreement immediately, look at your current contract to see if there are any penalties for canceling early. You will want to watch out for any wording in the contract that outlines the process for canceling the agreement, including if you need to leave a notice and how far in advance that notice should be. Typically, unless you cancel your contract on the agreed upon end date and provide proper notification (usually 30 to 90 days before the renewal date), you can expect some cancellation fees. The fee you pay will vary depending on the company, but it is usually a flat fee.

Step 2: Select a new factoring company

After you’ve looked over your current contract, it’s time to start looking for a new factoring company. Start by thinking about the services and features that are most important for you. To determine that, think back to why you’re switching factoring companies in the first place.

Common reasons to switch factoring companies

Cost is often an important factor. Beyond the obvious fees, there may be other hidden costs buried deep within freight factoring contracts. Other factoring companies require you to factor every load, even those that don’t make financial sense for you. Other issues may include poor service or surprise contract renewals.

Once you’ve determined the features and services you want in a new factoring company, carefully investigate different options to ensure that they meet your requirements in a service provider. Once you narrowed down your search, send request proposals and quotes. Think about your unique business needs and choose a factoring company that works best for you. Then, work out the level of service and terms you need with your chosen company.  

Step 3: Notify your existing factoring company of your intent to switch

After you have found your new factoring company, you should notify your current company of your plans to switch. When you change factoring companies, a process called buyout will usually happen. This is when your new factoring company buys any outstanding invoices that you have with your current company. The buyout fee for moving invoices to the new factoring company is often between 1.0% to 1.5%.

Notifying your existing provider of your intent to switch will give both companies enough time to prepare your account for the transition. You will be advised of the next steps and also the potential fees associated with the buyout process.

Step 4: Sign the agreement with your new factoring company

The next step is to sign your new contract with your new factoring company. Several things have to happen before your new contract kicks in. First, your new factoring company will have to approve your trucking company for service. Then, your new and current providers will have to complete the buyout process. Finally, you will have to give your old provider permission to disclose information about your contract to the new factoring company.

Step 5: Advise your shippers/brokers of the switch

Let any brokers and shippers you work with know about the upcoming change in advance. Be sure to mention the date the new factoring service starts and where they can send their payments. Of course, during the transition, your previous factoring company will forward your new provider any payments that are due. But, it’s still good to encourage the third-parties you work with to update their payment systems with the new factoring company’s details to avoid any delays in payment.

Step 6: Wait for the new contract to be finalized

You should plan for the change in advance to give each factoring company (your new one and your old one) time to agree on the details of the buyout. Then, after you have informed all stakeholders of the impending change, all that is left to do is wait for everything to be finalized.